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Real Estate As Abundance of Caution-Unsecured

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I keep getting requests from lenders wanting to do an unsecured business loan taking real estate as an abundance of caution. I am fairly new to the bank and I have told them on several occasions that we should not be doing this, but I am getting resistance and the lenders are trying to tell me that the bank has always done this. Can you tell me if there are any situations where it is acceptable to do this?

Abundance of Caution is a credit issue that affects when an appraisal is required and then affects some other regulatory situations.

The Interagency Appraisal and Evaluation Guidelines clearly spell out when a lien is taken in an abundance of caution. This carries through to Call Report classification, affects CRA reporting, and other limited circumstances. In many cases, the fact that a lien is taken in an abundance of caution does not eliminate the need to comply with other regulations such as flood insurance requirements, Regulation Z and RESPA.

2. Abundance of Caution

An institution may take a lien on real estate and be exempt from obtaining an appraisal if the lien on real estate is taken by the lender in an abundance of caution. This exemption is intended to have limited application, especially for real estate loans secured by residential properties in which the real estate is the only form of collateral. In order for a business loan to qualify for the abundance of caution exemption, the Agencies expect the extension of credit to be well supported by the borrower's cash flow or collateral other than real property. The institution's credit analysis should verify and document the adequacy and reliability of these repayment sources and conclude that knowledge of the market value of the real estate on which the lien will be taken as an abundance of caution is unnecessary in making the credit decision.

An institution should not invoke the abundance of caution exemption if its credit analysis reveals that the transaction would not be adequately secured by sources of repayment other than the real estate, even if the contributory value of the real estate collateral is low relative to the entire collateral pool and other repayment sources. Similarly, the exemption should not be applied to a loan or loan program unless the institution verifies and documents the primary and secondary repayment sources. In the absence of verification of the repayment sources, this exemption should not be used merely to reduce the cost associated with obtaining an appraisal, to minimize transaction processing time, or to offer slightly better terms to a borrower than would be otherwise offered.
In addition, prior to making a final commitment to the borrower, the institution should document and retain in the credit file the analysis performed to verify that the abundance of caution exemption has been appropriately applied. If the operating performance or financial condition of the company subsequently deteriorates and the lender determines that the real estate will be relied upon as a repayment source, an appraisal should then be obtained, unless another exemption applies.

First published on 12/04/2016

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